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Workplace Pension in the UK: A Guide for Overseas Employers

One way for employees to save for retirement is with a ‘workplace pension’ that is arranged and contributed to by the employer, as well as the employee.  This is set up in addition to any other private retirement plans or state pensions an employee may have and is often regulated by statute.

The UK has a very specific set of regulations when it comes to workplace pensions, and if you are new to hiring in the UK it is worthwhile to know both the employer and employee’s obligations and contributions.  The important thing to know is that pensions must be offered in the UK as a mandatory benefit for most employees, which may be a change from some countries where offering pensions (such as a 401k in the US) is optional.

Companies that are new to the UK employment rules may need guidance to make sure they are complying with this essential benefit, and this overview will get you started.

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Automatic Enrollment

In many cases, the enrollment of the employee in the workplace pension is automatic, meaning the employee does not have to make any choice or election, and cannot be encouraged by the employer to ‘opt out’.  Not every employee is automatically enrolled, but they will still have the opportunity to participate.

What criteria does the employee need to meet to be automatically enrolled?

There are a few conditions for automatic enrollment of the employee:

  • Classified as a worker
  • Age between 22 and ‘State Pension Age’ (age 66 in 2020)
  • Minimum earning of GBP10,000 annually
  • Employee ‘ordinarily’ works in the UK

When does the employer not have to automatically enroll the employee?

A number of exceptions exist to the automatic enrollment rules including:

  • Either employee or employer have given notice of termination of the position
  • Already part of a pension arranged by the employer that meets the criteria
  • Employee voluntarily opts out of the pension
  • Low income (less than GBP520 per month or GBP120 per week = no employer contribution)

Even if an employee falls within one of the automatic enrollment exceptions, they can nonetheless join the pension if they choose by notifying the employer.  Low income employees can still make their own contributions to a pension.

How long can an employer delay the date of enrollment?

Automatic enrollment can be delayed by the employer for up to three months, or longer if they are offering a full or partial defined benefit contribution.

How long do employers need to keep pension records?

To avoid disputes or discrepancies in pension contributions, pension records must be kept by the employer for six years.  These records should include both gross earnings and employer/employee contribution amounts.

Workplace Pension Contributions

There is a set amount of employer/employee/government contributions, depending on what type of pension that an employee qualifies for (automatic enrollment or voluntary opt in).

Minimum contributions by employers (as of April 2019)

Automatic Enrollment:

For employees that are automatically enrolled, the contributions are calculated based on total pre-tax earnings, which will include sick pay or maternity pay.  All of the contribution amounts are automatically run through payroll and noted on the payslip generated.

The employer contribution is a minimum of 3% of total earnings and the employee contributes 5%, for a total of 8% minimum.  In addition, the employee will receive a percentage of tax relief from the government, which will be added to the pension contribution.

Voluntary Opt-In:

If an employee chooses to opt in even if not automatically enrolled, then the employer only needs to contribute if the employee earns more than GBP520 per month.  The employee can contribute regardless of income level.   

Types of Workplace Pensions

There are two separate types of pensions available to employees’ workplace pensions, either ‘defined contribution’ or ‘defined benefit’ plans.

Defined Contribution

A defined contribution plan can be arranged with a pension provider either by the employer or employee, and the contributions are placed into investments by the pension provider.  The amount in the pension will depend on the contributions and investment performance over time.  25% will be tax free on withdrawal.

Defined Benefit

A defined benefit plan will be arranged by the employer, but payout will depend on the pension scheme rules, salary and how long an employee works for the employer.  There is also a 25% tax free amount available on withdrawal.

In defined benefit pensions, the employer can pay in more than the minimum and if the employer contributes more than their minimum, the employee’s minimum could be reduced as long as the 8% is met.  In defined benefit pensions, the contribution amounts may be set higher depending on pension rules.

Do you have more questions about the UK?

If this wide array of pension rules is overwhelming, you might have more questions such as:

If an employee opts out of the pension, can they opt in at a later date?

Can employees use salary sacrifice to increase their pension contributions?

Is the tax on defined contribution plans calculated based on the amount contributed or the final withdrawal amount?

These types of questions come up frequently for overseas employers, and we assist clients with finding solutions in the areas of payroll, benefits and labor laws.  We make international employment simple.

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